Forums › ACCA Forums › ACCA PM Performance Management Forums › Relevant cost
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- July 12, 2017 at 3:52 pm #395604
An information technology consultancy firm has been asked to do an urgent job by a client, for which a price of $2500 has been offered. Th? job would require the following:
+ 30 hours’work from 1 member of staff, who is paid on an hourly basic, at a rate of $20 per hour, but who would normally employed on work for client where the charge out rate is $45 per hour. No other member of staff is able to do the member of staff in question’s work.
+ The use of 5 hours of mainframe computer time, which the firm normally charges out to the external users at a rate of $50 per hr. Mainframe computer time is currently used 24hrs a day, 7 days a week.
+ Supplies and incident expenses of $200
Calculate the relevant cost?The answer in text book:
Labour (30hrs x $20)= 600
Opportunity cost of labour ( 30 hrs x ( $45-$20))= $ 750
Computer opportunity cost (5 hrs x $ 50)= 250
Supplies and expenses 200But this is my concern:
$600 labour cost is paid to the staff on an hourly basic so where he does this job or not this cost still incurred so it should not be included in relevant cost. the only opportunity cost of labour is $750please help me, i dont understand this point. Thank you
July 13, 2017 at 7:10 am #395703The labour will indeed be paid anyway.
So what will be lost by not doing the existing work will be the revenue from the existing work less the other variable costs (excluding labour) for the existing work.
The revenue less other variable costs is always equal to the contribution plus the labour cost.This is very commonly asked in the exam, and I do suggest you watch my free lectures on relevant costing where I explain this point.
(The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well).In future, if you want me to answer then you must ask in the Ask the Tutor Forum – this forum is for students to help each other.
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